WASHINGTON Senator Charles Schumer said on Friday that the United States should use a bid by China's state-run CNOOC for Canadian oil company Nexen Inc as a chance to take China to task for long-standing trade and investment issues.

Schumer, who has made criticism of China's economic policies a hallmark of his career, laid out a powerful political warning that many U.S. lawmakers expect China to open its doors to reciprocal investments, even as he made it clear that he does not object to CNOOC's $15.1 billion bid on its merits.

In a letter to Treasury Secretary Timothy Geithner, Schumer suggested the United States should withhold its blessing for the deal unless China addresses complex disputes over government procurement, foreign investment reviews and intellectual property rights.

The Obama administration gets to weigh in on the U.S. portion of the deal because Nexen has about 10 percent of its assets in the U.S. Gulf of Mexico, and U.S. law requires a formal national security review when a foreign company buys energy and other sensitive assets.

"It is rare that we have so much leverage to exert upon China," said Schumer, the Senate's No. 3 Democrat, who has argued that China fixes the value of its currency too low, creating unfair trading conditions.

Schumer, of New York, was among the most vocal critics in Congress of a proposed 2005 merger between CNOOC and the oil company Unocal, which was withdrawn under pressure.

His statements have been the strongest criticism thus far of the CNOOC-Nexen deal, but overall the deal has not yet produced a reaction in Washington anywhere near the Unocal controversy.

On Friday, a federal court froze assets of traders the U.S. Securities and Exchange Commission said illegally reaped more than $13 million in Singapore and Hong Kong accounts trading on inside information, buying up Nexen shares ahead of CNOOC's announcement.

OTTAWA IN DRIVER'S SEAT

The Canadian government will review the bid, and Canadian Prime Minister Stephen Harper has said there should be no assumptions about whether it will receive approval.

But Schumer's request to intervene in a deal involving a Canadian company caught many off-guard.

Canada's Foreign Minister John Baird side-stepped questions on Friday about Schumer's statements, saying his government would work to negotiate lower trade barriers in China "independently" from its decision on the takeover.

"Decisions about the Canadian economy, about our relationship - our economic relationship with China - will be made in Ottawa and not in Washington or New York," Baird told reporters in Ottawa.

The provincial government of Alberta, home to Nexen and its oil sands operations, is also watching the development closely, officials said.

NATIONAL SECURITY REVIEW

CNOOC has already informed the Committee on Foreign Investment in the United States (CFIUS), chaired by Geithner, that it will submit a formal filing for review.

That process involves an initial 30-day review, during which the Director of National Intelligence does a detailed analysis that goes to key cabinet members, said Benjamin Powell, a partner at law firm WilmerHale.

Because China's government controls CNOOC, U.S. law requires an additional 45 days of investigation, said Powell, former general counsel to the Office of the Director of National Intelligence.

The study focuses on "what you more traditionally consider as national security concerns" in contrast to Canada's more broad "net benefit" standard, which examines the economic impacts of foreign investments, Powell told Reuters.

It's unclear whether the CFIUS review of CNOOC's bid for Nexen would look at the broad trade issues identified by Schumer, he said.

"This does not have the hallmarks of something where they're buying sensitive telecommunications assets, or large portions of our domestic energy supply," he said.

The committee has the power to ask companies for "mitigation steps" to address security concerns, such as divestitures or security control agreements with the U.S. government, Powell explained.

"It's rare that the committee has not been able to resolve national security concerns," he said, also noting the president has the ultimate decision on whether to block a takeover of U.S. assets.

If the administration took a hard line against China, following Schumer's advice, Nexen conceivably could choose to divest its U.S. assets, a process that could hold up the deal and annoy U.S. allies, said Michael Levi, an energy policy analyst with the Council on Foreign Relations.

"It's more likely that Nexen would sell off its U.S. assets than that China would change its entire foreign investment policy," Levi said in an interview.

"The United States does not have a lot of leverage here," he said.

Still, Schumer's criticism is "laudable," Levi said, noting China does not provide the same kind of access to U.S. companies that the United States provides to Chinese companies.

(Additional reporting by David Ljunggren in Ottawa, Jeffrey Jones in Calgary and Doug Palmer in Washington; Editing by Eric Walsh and Anthony Boadle)

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